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April 2006

About This Issue

When Angelina Jolie appears on MTV trekking across Africa with a world-famous development economist and Bono makes it to the cover of Time for his work on behalf of the world’s poor, you can be sure that the issue of world poverty isn’t just for wonks any more. Wealthy citizens of wealthy countries seem to increasingly recognize the gulf between them and the rest of the world. But what, if anything, can the wealthy people of the world do that will really help? Billions upon billions have been spent by governments and institutions like the World Bank over the last half-century to launch less developed countries onto a trajectory of growth. Yet despite all this money—or perhaps because of it—many countries continue to languish in abject poverty. Do we need to spend even more, faster? Or have development efforts misunderstood the deeper causes of growth? How important are political and social institutions to the effectiveness of aid? And how important are intangibles like culture, belief systems, and human capital? Are there underappreciated opportunities for aid that we should hear from Ms. Jolie’s bee-stung lips and that Bono ought to be singing from the rooftops?

William Easterly, Professor of Economics at New York University and former World Bank economist, will kick off the conversation with an essay based on his new book, White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. Branko Milanovic of the World Bank, Deepak Lal, Jules S. Coleman Professor of Economics at UCLA, and Steve Radelet, Senior Fellow of the Center for Global Development, will round out the conversation with their expert comments.

Lead Essay

Why Doesn’t Aid Work?

I am driving out of Addis Ababa, Ethiopia to the countryside. An endless line of women and girls is marching in the opposite direction into the city. They range in age from 9 to 59. Each one is bent nearly double under a load of firewood. The heavy load propels them forward almost at a trot. I think of slaves driven along by an invisible slave-driver. They are carrying the firewood from miles outside of Addis Ababa, where there are eucalyptus forests, across the denuded lands circling the city. They bring the wood to the main city market, where they will sell the load for a couple of dollars. That will be it for their day’s income, as it takes all day to heft firewood into Addis and to walk back.

I later found that BBC News had posted a story about one of the firewood collectors. Amaretch, age 10, woke up at 3 a.m. to collect eucalyptus branches and leaves, then began the long and painful march into the city. Amaretch, whose name means “beautiful one,” is the youngest of 4 children in her family. She says:

I don’t want to have to carry wood all my life. But at the moment I have no choice because we are so poor. All of us children carry wood to help our mother and father buy food for us. I would prefer to be able to just go to school and not have to worry about getting money. [1]

The two tragedies

UK Chancellor of the Exchequer Gordon Brown recently gave a compassionate speech about the tragedy of extreme poverty afflicting billions of people, with millions of children dying from easily preventable diseases. He called for a doubling of foreign aid, a Marshall Plan for the world’s poor. He offered hope by pointing out how easy it is to do good. Medicine that would prevent half of malaria deaths costs only 12 cents a dose. A bed net to prevent a child from getting malaria costs only $4. Preventing 5 million child deaths over the next 10 years would cost just $3 for each new mother. A program to get Amaretch into school would cost little.

However, Gordon Brown was silent about the other tragedy of the world’s poor. This is the tragedy in which the West already spent $2.3 trillion on foreign aid over the last 5 decades and still had not managed to get 12-cent medicines to children to prevent half of all malaria deaths. The West spent $2.3 trillion and still had not managed to get $4 bed nets to poor families. The West spent $2.3 trillion and still had not managed to get $3 to each new mother to prevent 5 million child deaths. The West spent $2.3 trillion and Amaretch is still carrying firewood. It’s a tragedy that so much well-meaning compassion did not bring these results for needy people.

The West’s efforts to aid the Rest have been even less successful at goals such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government. The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago. Dozens of “structural adjustment” loans (aid loans conditional on policy reforms) made to Africa, the former Soviet Union, and Latin America, only to see the failure of both policy reform and economic growth. The evidence suggests that aid results in less democratic and honest government, not more. Yet, unchastened by this experience, we still have such absurdities as the grandiose plans by Jeffrey Sachs and the United Nations to do 449 separate interventions to reach 54 separate goals by the year 2015 (the Millennium Development Goals), accompanied by urgent pleas to double aid money.

Economic development happens, not through aid, but through the homegrown efforts of entrepreneurs and social and political reformers. While the West was agonizing over a few tens of billion dollars in aid, the citizens of India and China raised their own incomes by $715 billion by their own efforts in free markets. Once aid agencies realize that aid CANNOT achieve general economic and political development, they could start concentrating on fixing the system that fails to get 12-cent medicines to malaria victims.

Feedback and accountability

The two key elements necessary to make aid work, and the absence of which has been fatal to aid’s effectiveness in the past, are FEEDBACK and ACCOUNTABILITY. The needs of the rich get met through feedback and accountability. Consumers tell the firm “this product is worth the price” by buying the product, or decide the product is worthless and return it to the store. Voters tell their elected representatives that “these public services are bad” and the politician tries to fix the problem.

Of course, feedback only works if somebody listens. Profit-seeking firms make a product they find to be in high demand, but they also take responsibility for the product —if the product poisons the customer, they are liable, or at least they go out of business. Elected representatives take responsibility for the quality of public services. If something goes wrong, they pay politically, perhaps by losing office. If it succeeds, they get the political rewards.

Aid agencies can be held accountable for specific tasks, rather than the weak incentives that follow from collective responsibility of all aid agencies and recipient governments for those broad goals that depend on many other things besides aid agency effort. Examples of the latter include such unaccountable goals as the very fashionable campaign to achieve the UN Millennium Development Goals, or the sweeping goals of economic growth, government reform, and democracy for poor countries mentioned above. If a bureaucracy shares responsibilities with other agencies to achieve many different general goals that depend on many other things, then it is not accountable to its intended beneficiaries—the poor. No one aid agent is individually responsible for successfully achieving any one task in the current aid system. Without accountability, then the incentive for finding out what works is weak. True accountability would mean having an aid agency take responsibility for a specific, monitorable task to help the poor, whose outcome depends almost entirely on what the agency does. Then independent evaluation of how well the agency does the task will then create strong incentives for performance.

Although evaluation has taken place for a long time in foreign aid, it is often self-evaluation, using reports from the same people who implemented the project. My students at NYU would not study very hard if I gave them the right to assign themselves their own grades.

The World Bank makes some attempt to achieve independence for its Operations Evaluation Department (OED), which reports directly to the Board of the World Bank, not to the President. However, staff move back and forth between OED and the rest of the Bank—a negative evaluation could hurt staff’s career prospects. The OED evaluation is subjective.

Unclear methods lead to evaluation disconnects like that delicately described in Mali:

it has to be asked how the largely positive findings of the evaluations can be reconciled with the poor development outcomes observed over the same period (1985-1995) and the unfavourable views of local people. (p. 26)

Even when internal evaluation points out failure, do agencies hold anyone responsible or change aid agency practices? It is hard to find out from a review of the World Bank’s evaluation web site. The OED in 2004 indicated how eight “influential evaluations” influenced actions of the borrower in 32 different ways, but mentioned only two instances of affecting behavior within the World Bank itself (one of them for the worse).

Moving forward

The way forward is politically difficult—truly independent scientific evaluation of specific aid efforts. Not overall sweeping evaluations of a whole nationwide development program, but specific and continuous evaluation of particular interventions from which agencies can learn. Only outside political pressure on aid agencies are likely to create the incentives to do these evaluations. A World Bank study of evaluation in 2000 began with the confession “Despite the billions of dollars spent on development assistance each year, there is still very little known about the actual impact of projects on the poor.”

The solution is as obvious as it is unpopular—create a truly independent group of evaluators who have no conflict of interest with the World Bank or other multilateral development banks. Of course, there has to be incentives to do something as a result of the evaluations – allocations of money to multilateral development banks should go up or down depending on their average performance as rated by the independent evaluators. Also multilateral development banks should get credit for discontinuing failed programs or fixing them if they are fixable, while inaction should be correspondingly penalized.

Success through evaluation

In 1997, the Mexican Deputy Minister of Finance, a well-known economist named Santiago Levy, came up with an innovative program to help poor people help themselves. Called PROGRESA (Programa Nacional de Educación, Salud y Alimentación), the program provides cash grants to mothers IF they keep their children in school, participate in health education programs, and bring the kids to health clinics for nutrition supplements and regular checkups. Since the Mexican federal budget didn’t have enough money to reach everyone, Levy doled out the scarce funds in a way that the program could be scientifically evaluated. The program randomly selected two hundred and fifty-three villages to get the benefits, with another two hundred and fifty-three villages (not yet getting benefits) chosen as comparators. Data was collected on all 506 villages before and after the beginning of the program. The Mexican government gave the task of evaluating the program to the International Food Policy Research Institute (IFPRI), who commissioned academic studies of the program’s effects.

The academic findings confirmed that the program worked. Children receiving PROGRESA benefits had a 23 percent reduction in the incidence of illness, a 1-4 percent increase in height, and an 18 percent reduction in anemia. Adults had 19 percent fewer days lost to illness. There was a 3.4 percent increase in enrollment for all students in grades 1 through 8; the increase was largest among girls who had completed grade 6, at 14.8 percent. [2]

More anecdotally, people in a small village called Buenavista have noticed the difference. One mother says that she can feed her children meat twice a week now to supplement the tortillas, thanks to the money she receives from PROGRESA. Schoolteacher Santiago Dias notices that attendance is up in Buenavista’s two-room schoolhouse. Moreover, Dias says “because they are better fed, the children can concentrate for longer periods. And knowing that their mothers’ benefits depend on their being at school, the children seem more eager to learn.” [3]

Because the program was such a clearly documented success, it was continued despite the voters’ rejection of the long-time ruling party in Mexico’s democratic revolution in 2000. By that time, PROGRESA was reaching 10 percent of the families in Mexico and had a budget of $800 million. The new government expanded it to cover the urban poor. Similar programs began in neighboring countries with support from the World Bank. [4]

The lesson for aid reformers is: a combination of free choice and scientific evaluation can build support for an aid program where things that work can be expanded rapidly. The cash-for-education-and-nutrition in itself could be expanded, with suitable local adjustments, to more countries and on a much larger scale than it is now. A program like this in Ethiopia could get Amaretch and the other girls around Addis Ababa out of being slaves to firewood and get them in school where they can gain the skills to escape poverty.

Is it time yet?

It is time for an end to the second tragedy of the world’s poor, which will help make progress on the first tragedy. To gradually figure out how the poor can give more feedback to more accountable agents on what THEY know and what THEY most want and need. The Big Utopian Dreams about ending world poverty, such as the UN Millennium Development Goals hold nobody accountable. Can’t we just hold the agents of charity accountable, so they do get 12-cent medicines to children to keep them dying from malaria, do get $4 bed-nets to the poor to prevent malaria, do get $3 to each new mother to prevent child deaths, do get Amaretch into school?

Notes

* This article is a modified excerpt from the my new book, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (The Penguin Press: New York), 2006.

Response Essays

Thought-Provoking and Misleading

Bill Easterly has written a very thought-provoking book. And a very misleading book it is too. Why it is thought-provoking should be obvious. Why it is highly misleading I hope to explain.

There are at least three areas where the book misleads.

First, in stressing the amount that was spent on aid, Easterly mentions a figure of $2.3 trillion over the last fifty years. That figure, even if it is nowhere explicitly stated (one needs to verify it by reading a graph on page 183), does seem to represent bilateral aid, as defined by OECD, given by the rich world to the Third World governments. However, most of the book discusses World Bank and even IMF lending that can hardly be called aid—the concessional element in these loans being generally small (with the exception of World Bank IDA funds). So, is it aid or loans (which have to be repaid) that have been unsuccessful? The political implications are quite different. If it is aid that was stolen, the Western tax-payers can be legitimately angry since their money was misused. But if it is lending that failed, they do not have a particular reason to complain since these loans, being government-guaranteed, have to be repaid, and are being repaid. The joke is on poor countries. There is no White Man’s Burden.

To that potpourri of numbers, composed of aid, quasi-grants and almost commercial loans with strings that can hardly be called “aid” corresponds a potpourri of motivations. Some of “aid” is given for hard-nosed political and strategic reasons, to make friends and to stave-off Communists yesterday or Islamists today; some is given to employ domestic industries and turn out goods that are purchased by the South and which the South might not need at all; some is given to employ domestic bureaucrats who write useless “policy reports” for poor countries. And finally again only a tiny fraction of it is given with the objective of poverty alleviation in the Third World. So, if $2.3 trillion of “aid” did not manage to buy $4-worth mosquito nets it is hardly surprising. For the vast bulk of “aid” was never intended for those nets, but was led by entirely different motives and objectives.

Easterly does a slight of hand by describing this potpourri of money as “aid” and then, accepting at face value the claims of politicians, by ascribing the purely altruistic motivation to it. This is something that Easterly knows not to be true from his own empirical work where he has carefully documented (when studying World Bank lending) how “aid” responds to political objectives of the “donors.” But in this book, he has chosen to ignore it and to pretend to believe the self-serving pronouncement of politicians and aid-business lobbyists.

Easterly is thus perpetuating the myth that “aid” is motivated by Western benevolence only which in turn fuels the dissatisfaction with “aid” and allows him (and others) to shift the entire blame on corrupt governments in the Third World. Now, exposing what the true objectives and the composition of “aid” are is not impugning Western motives. They are perfectly understandable and normal. Even at a purely individual level, we never give anything to others with a sole objective of increasing their welfare. In our giving, we are also led by our own objectives: to make friends, improve people’s opinion of ourselves, do as the preachers enjoin us to, influence the way of life of others etc. But while we may claim that we are being led by humanitarian motives only, researchers should be able to see thorough the hypocrisy.

Second, Easterly stacks the deck by creating a false dichotomy between successful “searchers” for solutions and inept and corrupt bureaucrats who impose (wrong) solutions. This dichotomy is a “no-brainer.” The advantage of the first (searcher) is already contained in the premise. The point is to see whether there is anything that governments can do to make life easier for the “searchers”. Easterly seems to believe that there is nothing. But this cannot be true. “Searchers” also need governments to protect their property and life, to educate their children, to vaccinate them against diseases, to build roads on which they travel, to catch the thieves etc. There is no necessary conflict between the two. There is actually complementarity between “searchers” and governments.

Third, Easterly derides as grandiose and unrealistic the Millennium Development Goals and Jeffrey Sachs’ call to double “aid”. But, at the same time, he proposes a no less grandiose bureaucracy that would oversee the lending institutions and decide whether they are fulfilling the goals of poverty alleviation or not. But what are the tasks “whose outcome depends almost entirely on what the agency [the World Bank] does” and for which it should therefore be accountable? For the World Bank, caught between the Scylla of the interests of its large shareholders and the Charybdis of the objectives of recipient governments, it is impossible to define a single objective for which it can be held fully responsible. So, Easterly’s proposal is no less utopian that those he criticizes.

Finally (and it is not a misleading but ethically troubling part), in singling out for praise the work of evaluators of different anti-poverty programs (like PROGRESA) and in floating the idea of a committee of “wise men” who would oversee the World Bank, Easterly puts forward an extremely technocratic view of the world where a group of well-fed and smart rich men are supposed to find out, using fancy econometric tools, what is best for the huddled masses. He thus ends up at the opposite end of what he starts by advocating. Moreover, Easterly seems unaware of the deeply troubling moral implications of experimentation such as done under PROGRESA. If we treat poor people simply as objects, as guinea pigs whose behavior we shall observe to decide what works and what does not, then why not do more experimentation and random trials? Why not randomly distribute cookies in schools and see if children fight for them or not? Or why stop there: why not give random unemployment benefits? These troubling ethical aspects of treating randomization and poor people as the ultimate “other” are not given a thought in Easterly’s book.

It is somewhat ironic, I think, that Bill Easterly, who has spent a large part of his life working on issues of growth, poverty and inequality in poor countries and whose knowledge and intellectual capacity is second to none, has written a book that, despite his protestation to the contrary, will be used to set back the agenda of poverty alleviation and provides an argument for those who have long argued that the best policy is to do nothing and ignore the poor world. Let them eat cake!

There is No Fix for Aid

I agree with Bill Easterly that aid has not achieved goals “such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government.” But his hope that aid can achieve the less ambitious goals of getting “medicines to children to keep them dying from malaria…, $4 bed-nets to the poor to prevent malaria…$3 to each new mother to prevent child deaths..[and to] get Amaretch into school” through making the aid agencies accountable for specific tasks through rigorous academic evaluations of outcomes is also likely to be belied. This is so for a number of interrelated reasons, at the center of which is the character of the domestic governments to which aid is extended.

Thus consider the main form of humanitarian aid–food during famines—which would seemingly be an uncontroversial objective. But, as has been copiously documented, many famines, particularly in Africa, have been created or aggravated by governments who have used them as an instrument to coerce opponents in ongoing domestic civil conflicts. They have then prevented the food aid from reaching its victims. The latest example is the famine engineered in the former breadbasket of southern Africa— Zimbabwe—by its current Big Man, Robert Mugabe, to punish and coerce his political opponents.

These problems of “governance,” as they are euphemistically labeled, relate to the central dilemma faced by those who wish to use foreign aid to meet the obvious needs of the poorest in the developing world. For unlike private charity, foreign aid essentially transfers money from rich country governments to poor country governments. How can these donor governments ensure that the recipient governments use these resources for the purposes they were intended? As the history of foreign aid’s failures, particularly in Africa show, despite their promises there is little that the donor governments have been willing or able to do if the recipient governments do not fulfill them. Nor is channeling these flows through international or domestic NGO’s likely to overcome this problem, for these so-called “agents of civil society” too can be coerced or co-opted by predatory governments. That is why in a recent book I had argued that short of direct or indirect imperialism there seems to be little hope of overcoming the domestic political obstacles to the efficient utilization of foreign aid, particularly in Africa, where most of the current efforts of the “do gooding” brigade in the developed world are rightly concentrated.[1] Given this political constraint, the best the rest of the world could do for Africa is to keep its markets open for the free flow of trade and capital, but otherwise leave Africa alone, to sort out its own problems.

Easterly clearly thinks that there might still be some form of escape from what will appear to the world’s great and the good as a defeatist and gloomy conclusion. But the very example he cites—the role played by accountability and evaluation in the Mexican Progressa education program as a prototype for future aid projects—shows up why foreign aid is unnecessary for such programs. This was a Mexican program not funded by foreign aid. In fact in all the currently fashionable “soft” areas—health, education, democracy, gender etc.—favored by aid donors, there is no need for foreign money. Countries which subscribe to the worthy objectives of the aid donors do not need foreign money to do the right thing; they today have enough domestic money for these purposes. It is the ineffectiveness of this expenditure in meeting these objectives that leads to the observed dismal outcomes. Thus India spends a fair amount on public education but as official report after report has documented, this expenditure is wasted as the teachers do not turn up to teach, the school buildings are not built, and there are no books for which expenditure has been sanctioned. It is the will to do the right thing that remains in question in achieving even these modest objectives favored by Easterly. Foreign aid will make no difference, for as the adage has it: “You can lead a horse to the water but you cannot make him drink”.

Secondly, in these soft areas foreign aid agencies have no comparative advantage in effectively targeting these expenditures as they lack the local knowledge on which their efficiency depends.

Neither is Easterly’s desire to ensure professional evaluations of aid projects likely to deliver the goods. In fact in my first incarnation at the World Bank in the early 1970s I was involved in helping it to produce a project evaluation manual which was then supposed to be used to evaluate both projects and their outcomes for their social costs and benefits. As one wag commented this soon became “social cosmetic” analysis. The project officers who were making the loans had moved on by the time the project was completed, their career prospects depended on the amount of lending and not on the outcomes, which would in any case take a long time to manifest themselves. The official World Bank post evaluations, as Easterly rightly notes, are little more than window dressing which do little for the effectiveness of aid.

The unpalatable truth for the many well meaning people who are moved by world poverty and want to do something is that, over the years, alleviating world poverty has become a large international business from which a large number of middle class professionals derive a good living. They have been aptly described by a former East African correspondent of the Economist as the “Lords of Poverty.”[2] Easterly’s suggestions for making aid effective will merely provide them a new play! The truth is that aid is not only ineffective; it is actually counterproductive. It will be a cruel joke on the Amaretch’s of the world if it is now believed that some bureaucratic fix of the aid machinery will get them to school.

Ideally the time has come to pension off the Lords of Poverty. But this will not happen. For, as the recent outpouring of support for various celebrity promoters of foreign aid shows, there is a large constituency in the West to continue these failed programs to assuage their guilt. But then it is best to be clear headed about what can be achieved. The best analogy I find is with my action in giving a dollar to a beggar on the streets of Los Angeles or London. I do not take him to the nearest food shop to buy something nourishing. I know perfectly well that he will probably blow it on drink or drugs. But I still hand over the dollar because it makes me feel better. Similarly, it is best to end the futile attempt to fix “aid” to make it more effective. It is best to just hand the requisite checks to the governments of the poor, in the full knowledge that this will not do much for the world’s poor but will make us feel less guilty!

Notes

* This is based in part on a section of my forthcoming book Reviving the Invisible Hand: The Case for Classical Liberalism in the Twenty-First Century (Princeton University Press, 2006)

[1] Deepak Lal, In Praise of Empires, (Palgrave Macmillan, 2004).

[2] Graham Hancock, The Lords of Poverty: the Power, Prestige and Corruption of the International Aid Business, (Macmillan, 1989).

Evidence Beats Rhetoric, Every Time

Time for a reality check! While some of Bill Easterly’s ideas for improving aid are good ones, unfortunately his attacks are way over the top and totally one-sided. This approach ultimately weakens his credibility and the power of his analysis, and as Branko Milanovic points out, will be used to set back the very agenda he wants to pursue. Alas.

Claiming that aid has been a miserable failure is popular with journalists, ideologues and naysayers (and it helps sell books). But the accumulated evidence over the past decade suggests a much more nuanced and more positive story whereby aid has done a fair amount of good despite it weaknesses and failures in some countries. Certainly, much can be done to make aid more effective. But those that argue the extreme view that aid doesn’t work are just as wrong as those that argue that it is the magic elixir for growth.

I hate to interrupt a spirited debate with facts, but occasionally they are useful. Let’s start with the claim that the West has spent $2.3 trillion in five decades with precious little to show for it. $2.3 trillion! Wow! What a huge number! Except…it’s not.

Take a closer look: $2.3 billion over 50 years is $46 billion a year, a modest amount for any global capital flow. And only about half went to low income countries, with the rest to middle-income countries like Israel that didn’t need it. So we have around $26 billion a year for all the low income countries. This works out to be a rip-roaring $14 per person per year in low-income countries. Much of that goes to consultant reports or is tied to purchases in donor countries where it gets much less bang for the buck. As a result the recipients actually get far less than these figures indicate. So let’s cut the grandstanding. It ain’t much. In Easterly’s judgment, based on his opening vignette, because poverty still exists in Ethiopia after it has received all of $14 per person in aid per year (Ethiopia happened to receive exactly the average amount), “aid doesn’t work.” Please!

So aid amounts have been modest. Have they done any good? Certainly much was wasted on rapacious dictators like Joseph Mobutu, Ferdinand Marcos, and Baby Doc Duvalier (our allies, one and all: I’m shocked—SHOCKED!—to find they didn’t use the money to fight poverty!). Some aid went down the tubes with dumb ideas or even worse implementation. And average income in Africa is about the same as it was two generations ago. But that is only one side of the story. Korea until the early 1970s received more than three times as much aid per person than the average low-income country. Botswana is Africa’s great growth miracle, and since 1960 it has received 8 times—8 times!—more aid per person than the average low-income country (and still today receives more than the average low-income country). More recently, large recipients like Mozambique and Uganda have nearly doubled their incomes since the early 1990s. In much maligned Egypt, since 1960 average real income has tripled, infant mortality has dropped from 189 to an astonishing 35 per thousand, and literacy rates have nearly doubled.

Easterly rightly despairs that millions still needlessly die of disease (despite our generous $14 of assistance), but he neglects to mention those that now live. A recent book documents how millions of lives have been saved in developing countries through large-scale health interventions in the last several decades. [1] Routine immunizations save 3 million lives every year. Small pox was eradicated, and polio nearly so. And there has been enormous progress in fighting river blindness, guinea worm, diarrheal diseases, and others. Aid programs did not always discover these medicines and technologies (although in some cases they did, like oral rehydration therapy to fight diarrhea), but they were central to delivering them to the poor. Without these programs, millions of these people would be dead. Tell them that aid has been wasted, and that we all would be better off without it.

But what about economic growth? After all, everybody knows that the research shows that there is no relationship between aid and growth. Except…um, that’s not what it shows. I used to think it did, because that’s what all the pundits say. But then I did something radical: I read the research. And here is the dirty little secret: most of the published research over the past decade has shown a modest positive relationship between aid and growth—not in all countries, to be sure, but on average across countries over time.

I am not talking about the famous research by Craig Burnside and David Dollar that aid works if countries have good policies or institutions. Easterly and others have shown that these “conditional” results are fragile. I’m talking about the much less sexy yet solid research by people like Henrik Hansen, Finn Tarp, Robert Lensink, Howard White, and several others, much of it published in peer- reviewed journals. [2] Never heard of these studies? You should read them—you’d be way ahead of most of the pundits! You may not agree with this research, but let’s stop misleading the world by telling them it doesn’t exist.

Here is how the research stacks up. One small set of studies, mostly unpublished, which Easterly loves to cite, finds no relationship, but is based on two important erroneous assumptions: (1) aid has a fixed proportional impact on growth, so that the first dollar and the hundred-millionth dollar of aid must have the same impact on growth, and (2) all aid affects growth equally, whether it is spent on emergency food for refugees, consultant reports, or building roads. A second, larger but less publicized set of studies relaxes the first restriction, and allows aid to have diminishing returns on growth (remember that from your first economics class?). A few newer studies relax the second restriction, allowing different kinds of aid to have different impacts on growth. Almost all of these studies find a modest, positive, statistically significant relationship, and they have held up well to scrutiny. Surprise! But don’t bother to tell the journalists—modest good news doesn’t sell.

In a recent study I conducted with Michael Clemens and Rikhil Bhavani, we found that aid actually aimed at growth (about half of all aid) had a positive and significant impact with diminishing returns, with an estimated average rate of return of around 13%. [3] Our results have been tested, re-tested, tortured, and banged on by many observers, but they have held. A recent and well-publicized study by Ragu Rajan and Arvind Subramanian purported to find no aid-growth relationship, but almost all of their results were based on the two false assumptions above. [4] In the few cases where they allowed for diminishing returns, the results were always positive, and where they both allowed for diminishing returns and examined the subset of aid actually aimed at growth, they found positive and significant result, confirming our results.

So where does this leave us? First, the rich countries have given very modest amounts of aid. Second, aid has achieved very modest results in many places, strong results in a few, and failure in others. Third, aid is no panacea – trade policies, institutions, decent governance and the rule of law, private entrepreneurship, and investments in health and education are the mainstays for growth. But aid can help and has helped on the margin in very poor countries, at least in some circumstances. Fourth – and here is where I agree with Easterly—aid programs are not nearly as effective as they could be, much is wasted, and we can and must do better. How do we do that?

First, I strongly agree with everything Easterly says about feedback and accountability. We need clear, measurable goals, and aid programs should be constantly assessed against those goals by independent monitors. Second, we should separate our politically-motivated aid from aid aimed at development. If we want to give aid to Israel, Pakistan, Jordan, and Colombia to achieve other foreign policy goals, fine. But as Milanovic argues, let’s not pretend those funds are aimed for development, nor judge their success that way. Third, let’s get away from one size fits all, and deliver aid differently in different countries. In democracies with better governance, provide most of the aid to the government. But in corrupt dictatorships, give less, make shorter commitments, keep it on a tighter leash, and give most (if not all) through NGOs and faith-based groups on the ground to deliver basic services. But most of all, let’s get away from the broad-brush ideological sound bites on both sides that only fog the real issues, and find ways to deal with difficult problems with practical, hard-headed solutions.

[2] See, for example, Henrik Hansen and Finn Tarp (2001), “Aid and Growth Regressions”, Journal of Development Economics, 64: 547-570; and Robert Lensink and Howard White (2001), “Are There Negative Returns to Aid?” Journal of Development Studies, 37 (6): 42–65. Several other studies reach similar conclusions. For a survey see Michael Clemens, Steven Radelet and Rikhil Bhavnani (2004), “Counting Chickens When They Hatch: the Short-Term Effect of Aid on Growth,” Center for Glocal Development Working Paper #44 (November).

[3] Michael Clemens, Steven Radelet and Rikhil Bhavnani (2004), “Counting Chickens When They Hatch: the Short-Term Effect of Aid on Growth,” Center for Glboal Development Working Paper #44 (November).

[4] Raghuram Rajan and Arvind Subramanian “Aid and Growth: What Does the Cross Country Evidence Really Show?” IMF Working Paper WP/05/127 (June, 2005).

The Conversation

Reply to Comments: Logic Beats Illogic, Every Time

The most spirited part of the debate is provided by Dr. Radelet. I hardly need to argue with Dr. Radelet, as he spends most of the time arguing with himself. Aid amounts to virtually nothing, yet accomplishes miracles of raising growth and saving lives. Aid is doing just fine, but needs to be drastically reformed anyway. Aid should not go to middle income countries, except he celebrates middle income “aid success stories” like Korea and Botswana. We should judge on the basis of econometric evidence on average results, except for when he can selectively use data points to support his case. Facts should be used instead of rhetoric, except when he feels the need for ad hominem attacks. We should suppress the debate on aid for the sake of the cause, except for presenting his side of the debate. I should not use unpublished studies, except for Radelet’s own unpublished study. Scientific methods should be used to judge aid’s effects on growth, except for searching across every possible statistical specification until you get the “right” result (which promptly falls apart when other researchers try to replicate it.) Aid does have positive effects on growth, yet aid donors have mysteriously overlooked this positive potential and allowed Africa to stagnate for decades. Aid does have positive effects on growth, except in Radelet’s own “diminishing returns” study in which the most aid-intensive countries have a zero or even negative effect of additional aid on growth.

Dr. Milanovic and Professor Lal both are alarmed at the prospect of a technocratic mega-bureaucracy for evaluation. I said nothing to advocate such a frightening prospect. Actually, evalution lends itself to being one of the least bureaucratic and least centralized activities imaginable. A decentralized array of evaluators who pass minimum tests for methods and independence, many of whom could provide the evaluations on their own initiative, can provide an independent reality check on aid. Nor does it have to be technocratic. While some evaluations could be done rigorously with sophisticated methods, there is also a big role for more informal mechanisms to give voice to the poor on whether aid is reaching them.

Dr. Milanovic, like Dr. Radelet, also worries that debate about aid will be used to set back the cause. I think the absence of debate and the resulting lack of learning from the past on how aid can be more effective is the greater danger. Why are we fine with fierce debates on how best to benefit rich people in rich societies, but don’t want the poor to get the benefits of debate (including hearing from the poor themselves) on how they can be better off?

Professor Lal agrees with the book’s portrayal of the problems, but thinks no aid fix is possible. I am more optimistic: if you have a supply of rich people wanting to help the poor, and a demand for help on the part of the poor, why it is so impossible to bring the two together?

Why Not a Global Welfare Agency?

There are two additional points I would like to make regarding aid. First: we all are concerned (upset, unhappy) about the fact that aid is not efficient as it could be. The minimum that aid should accomplish however is to ensure progressive transfers at the global level. This means that aid money should flow from people who are richer to people who are poorer. This is also the minimum one expects within individual nations: welfare benefits should help people who are poorer than the taxpayers who finance these benefits. What can we say about aid in that regard? Consider the following fact.

The random dollar (since we do not know what exact dollar is used to finance aid vs. other government spending; nor does it matter since money is fungible) that is used to finance US aid comes from people who are in the 91st percentile of US income distribution. Now, these people have a net or disposable income of about $33,000 per person per year. (For those who are used to thinking about household net income, that means that this household, assuming a family of four, has about $130,000 in net terms, or more than $200,000 before taxes.) Now, the question is, how likely is it that these tax dollars will end up in the pockets of somebody richer than the US taxpayer? The answer is, very unlikely. Even in the middle-income countries with high income inequality, like Brazil, there are fewer than 2 percent of people whose income is higher than $33,000 per person per year. (All these are calculations based on the data from my book Worlds Apart, Princeton University Press, 2005.) For other countries that are poorer or have more equal income distributions, there are even fewer people with such high incomes and the likelihood of a regressive transfer is even less, almost minimal. The bottom line is this: regressive transfers at the global legal are quite unlikely, unless one is willing to argue that the benefits of aid are appropriated only by the very, very top of the income pyramid in poor countries. This is not impossible but is not probable.

Second: should we do perhaps things radically differently? Yes, I think we should. Assume for the moment that the world is a global community with a single government. What would such a government do? It would probably have an agency like US Department of Health and Welfare that would try to target transfers to the truly poor. Obviously, at the world level, solidarity between people living in different countries is less than the solidarity (and willingness to transfer money) between people who live in the same country, but it is not nil either. A global welfare agency could be financed by a tax paid by the rich people in rich countries (such as a small tax on air transport, or financial transactions or any other luxury good with high income elasticity). The agency would then disburse that money, in cash, to the poor people in poor countries directly rather than having to go, as now, through their governments in order to reach them.

This change would take care of the major cause of aid leakage: governments, and other agencies, intermediation which often result in useless projects. If a global aid agency can deal directly with poor people and give them aid in cash, there would be no leakage at all, except for possible mistargeting, i.e. giving cash to the people who are not poor. But such mistargeting is rather unlikely: it would be quasi-impossible to argue that, say in Zimbabwe, cash aid should go to government employees rather than to the children of illiterate farmers. On the other hand, mistargeting is much easier to conceal under the current system where one deals with governments and large projects: who can really compare benefits of a new school with those of a

factory that may (or may not) employ several hundred people? By delivering aid in cash, we do not tell poor people what they should do (go to school or get a job in a factory), and how they should spend their money. We just allow them to decide, without paternalism, on their own. And we improve, ever slightly, their condition.

Note finally that a global welfare agency introduces a similarity in its treatment of poor and rich countries. Yes, some of the national prerogatives of tax-raising power would be lost by the rich countries, but similarly some of the poor countries’ sovereignty would be lost in the process as well. Poor countries’ governments would not have to agree to a particular transfer. The global welfare agency would deal with poor people directly, whether poor countries’ governments like it or not. (More on this idea can also be found in my book quoted above.)

The Record of Aid in a Complex World

In his response, Dr. Easterly uses an old tactic: he creates fictitious positions and attributes them to me, then attacks them. Just to set the record straight before getting on to more interesting substance: He claims I said that aid “accomplishes miracles of raising growth.” I actually wrote that “aid has achieved very modest results in many places, strong results in a few, and failure in others.” I also said that those that claim miracles are just as wrong as those that claim total failure. He claims I say that “aid is doing just fine” when I wrote that “aid programs are not nearly as effective as they could be, much is wasted, and we can and must do better.” He claims that in my own study “the most aid-intensive countries have a zero or even negative effect of additional aid on growth;” in fact we find nothing of the sort—there are no such outcomes in our study. He claims I use data points to selectively make my case, when in fact I wrote both about aid failures (the Democratic Republic of Congo, Haiti, the Philippines, and others) as well as its successes (Mozambique, Uganda, Korea, Botswana, the latter of which were low income countries when the received the bulk of their aid, not middle income as Dr. Easterly claims). And on it goes with each point in his response.

But enough of that; on with the substance. One reason why some studies have had difficulty in identifying an aid-growth relationship is that they assume that all aid must affect growth in an identical way. But in the real world this makes little sense. Food and humanitarian aid are aimed primarily at supporting basic consumption, not growth, as is the provision of medicines, bed nets, and school books. Aid to support democracy or judicial reform is not primarily aimed at stimulating growth. So in our research we recognize these differences and break aid flows into three separate categories.

The first group is aid for disasters, emergencies, and humanitarian relief efforts, including food aid. It turns out that this kind of aid has a negative relationship with growth, since a disaster simultaneously causes growth to fall and aid to increase. The Asian tsunami caused extensive damage and undermined economic growth, and donors responded with substantial increases in aid. The fact that aid went up when growth went down is obviously not because aid failed, but it looks like a negative relationship in simple studies.

The second category is aid that might affect growth, but if so, only indirectly and over a long period of time. Aid to halt environmental degradation, support democratic or judicial reform, or for childhood immunizations might affect growth, but it will take a long time and will be very hard to detect. Sure enough, it is very hard to detect a statistical relationship between this type of aid and growth, one way or the other.

The third category is aid aimed more directly at economic growth: for roads, irrigation systems, electricity generators, ports, agriculture, industry, trade, and similar activities. It turns out that this type of aid (about half of all flows) has a robust positive relationship with growth. It is no miracle cure: the rates of return average in the modest neighborhood of 13%. And it does not mean that this type of aid has worked everywhere: for some countries the relationship is stronger, and in others it is weaker. But on average there is a modest, positive, statistically significant relationship.

The real world is a messy place, and the truth does not fit into nice neat categories like “aid has failed” or the other extreme of “aid accomplishes miracles.” It gets messier when we try to force all aid into a single relationship. An even-handed review of the evidence suggests that aid (especially aid actually aimed at growth) has achieved modest results in many places, strong results in a few, and failure in others, and has contributed to improved health in many countries. The humble positive track record leaves substantial room for improvement. This evidence does not lend itself well to simplistic sound bites, but it accurately reflects the world.

The real challenge, then, is to move beyond the rhetoric and figure out how to build on the successes, learn from the failures, and make aid more effective going forward. And as I said in my first note, Dr. Easterly’s suggestions for greater feedback, accountability, and measurable results are a good place to start.

Remittances Aren’t Aid

In my initial post I mentioned that real aid (unrequited transfers to unattached individuals in foreign countries, and loans with a large concessional element) is often intentionally bundled together with other “things” like quasi-commercial loans, and even loans with many conditionalities, as most of World Bank’s and all of IMF’s loans are, to give the appearance of a larger “aid” flow.

Today, I read in a Washington Post editorial that the Hudson Institute has done a new study of U.S. foreign aid that takes this arbitrary piling up of everything under the sun as “aid” one step further. They treat as “aid” remittances transferred by foreign (or American) nationals to attached individuals in their home countries. US foreign aid thus comes close—thanks to the large remittance flows—to 0.7 percent of GDI, the thirty-year old target to which the rich world had committed itself on paper but of course had never come close to fulfilling (with one or two Nordic exceptions).

Clearly the potpourri of funds and motivations that are labeled aid is likely to keep on growing. Perhaps soon another institute will label all foreign investments aid as well; foreign investment creates jobs in faraway places, doesn’t it? Now, back to remittances. I do not know if the authors of the Hudson report (which I have not read; I only saw a summary in today’s Washington Post) had ever talked to anyone to who sends remittances home (I do send them, by the way) but if they did, they would have realized two things.

First, remittances are not philanthropic transfers. They are most often part of a long-term quid pro quo relationship between nuclear and extended family members and even friends in the “old country” and worker in the United States (or Germany, or France). In exchange for remittances, the worker gets a score of small services that the family members or friends back home do for him: keep on eye on his house, take care of his aging parents, deal with local administration, buy and send him local books that he would like to read, new movies he would like to watch, local food etc. Each of these services cannot be paid one by one, as if a commercial entity were rendering them. They go unpaid. Should a person in the Philippines send a bill to his cousin in the United States charging him a per-hour rate for the time spent waiting for some government paper that the latter needs? Should a cousin send a bill for caring for worker’s ailing parents? But they are being performed under the implicit assumption that the person residing in the United States will from time to time help financially his cousins or friends.

Second, those who classify remittances as foreign aid are unaware that in all studies of welfare, the key welfare-sharing unit is household. Transfers within households do not fall under the normal market rules that transfers between individuals and the rest of the world (=market) do. This is why we do not include unpaid work of housekeeping in gross domestic product, or parents doing children’s homework, or my son fixing the garage door. Similarly, transfers of money within household or extended household just because members of the household live in different countries are not different from transfers of money between these members when they live in the same country. Our family welfare is the same whether I give $10 to my son to spend it on a movie, or use $10 to buy coffee for me and my wife.

This bring me back to what the correct definition of aid is: unrequited transfers (that is, transfers that are not expected to be paid back) to organizations or people in foreign countries with whom we do not have continuing and close relationship; that is, to the people who are in principle unknown to us and whom we want to help out of philanthropy.

It is worth pointing that the misuse of remittances in this respect is not something altogether new. It is for example appalling that the U.S. government puts severe limits to the transfer of remittances by (among others) Cubans living in this country to their family and cousins in Cuba. It made me think of a Stalinist system where people are treated as if they are state owned. Here too, the US government seems to treat Cubans (many of whom are U.S. citizens) as if it owned them, and has the right to prevent them from transferring their own money to their own family members. Using this example, we can easily see how stark is the difference between remittances and aid. The U.S. government would be perfectly within its rights to ban (say) any humanitarian and other aid to whatever country it does not like and not to allow U.S. citizens to contribute to it. This is exactly what is currently happening with the ban to contribute to many Islamic associations that, according to the U.S. government, combine charity and arms-dealing, or perhaps even engage in terrorism. But it is an altogether different and shocking thing to prevent citizens to give money to their own wives, husbands, children, mothers and fathers. This is why that money cannot be labeled “foreign aid” by any stretch of imagination.

Econometrics, Global Welfare, and Palliative Measures

Far be it from me to enter into the war of the econometricians between Bill Easterly and Steve Radelet. It is reminiscent of the similar war conducted by Rodrik and Sachs and Warner on the case for trade openness. As two eminent economists of an older generation who take a skeptical view of the current passion among the young for cross-country regressions wrote surveying that debate: “the squabbles among the foes and the friends of open trade, based on these crude cross-country regressions, amount to little more than ‘mutual assured destruction’ by (or perhaps the MADness of) what we might characterize as the RHS warriors!” [1] On the growing reliance on such regressions to provide ‘scientific’ evidence for one’s prior beliefs, Bob Solow rightly commented: “I do not find this a confidence inspiring project. It seems altogether too vulnerable to bias from omitted variables, to reverse causation, and above all to the recurrent suspicion that the experiences of very different national economies are not to be explained as if they represented ‘points’ on some well defined surface” [2] If forced to choose between Easterly and Radelet I would side with the former, because his position gels with the wider evidence about the effectiveness of aid I have seen, some of it given in his new book.

Bill Easterly says he is more optimistic than me about an aid fix, as he thinks there is a supply of rich people willing to help the poor, and a demand for help on the part of the poor. So it should be possible to bring them together. But he doesn’t face the problem that, whatever form this foreign aid takes, it has to be mediated by local governments, who as he himself documents can thwart the wishes of the suppliers and the demanders.

Branko Milanovic tries to take this bull by the horns and in effect argues for (or assumes?) a world government which can make welfare transfers as within nation states. If he really believes that a world government is in the offing, this is certainly news to me. I know there are those in the IR community, particularly around Richard Falk at Princeton, who believe that a world community is emerging through the UN and its agencies which will spontaneously create a world government which will promote global justice and virtue. [3] The claim of these Global Salvationists, echoed by Milanovic, is that there is a universal moral consensus for a global welfare state. But it is easy to see this is a mirage.

Consider for instance the single most effective measure which would alleviate the poverty of the world’s poor: their free immigration into the rich countries. This in fact happened in the 19th century period of globalization. Today, by contrast, there are ubiquitous controls on immigration in every country. Why? Because the creation of Western welfare states in the last century has created ‘property rights’ in citizenship, as the welfare state implies that any citizen has the right to pick the pockets of fellow citizens. The fierce debates about immigration in the West show that there is no moral consensus in them to grant the world’s poor these ‘property rights’, by allowing their free immigration into their countries. Aid then becomes a mere palliative to assuage Western guilt. But just as my dollar to the LA beggar does little good and costs me little in terms of lost utility, the Western public is willing to give small sums for foreign aid to assuage their guilt, but not the massive transfers aid lobbyists have demanded. It is not surprising therefore, that as both Radelet and Miilanovic complain, the sums given for ‘genuine aid’ are small. This small flow will continue and keep the Lords of Poverty and their official agents in the third World in business, but they should at least be honest and accept that it is not going to make any remarkable change to the lives of the world’s poor.

Tobin Tax, Imperialism, and Globalization

One (of the many) differences between Professor Lal’s views and mine is that I believe that good things may happen in the future (though I cannot demonstrate they will), while he believes that good things did happen in the past or are happening today (but, unfortunately for his case, they can be demonstrated to have been bad, rather than good).

On the first point, I cannot prove that something akin to Global Welfare Agency may come to pass. But I do not think that the modicum of global moral consensus needed for it is a “mirage.” The Tobin tax, which is one of the two key parts of such an agency (the second being its ability to deal with individuals in poor countries, not governments), has already been endorsed by the World Bank Chief Economist, by the French, the Brazilian and a few other governments. For sure, we are not on the eve of the agency’s opening day, but we are much further along that path than ten years ago. Had the United States had a more enlightened and open-minded government since the end of the Cold War, I would venture to say that we would have been much closer than we are now. And we would be spending money on creating the underpinnings of just globalization rather than on security contractors and such. Note finally that the cash allocation of welfare for which I argue does take care of “the lords of poverty” objection raised by Professor Lal. “Lords of poverty” exist currently because the road from a dollar paid by the US taxpayer to the ultimate recipient is lined with scores of people who try to take a cut, from those who want to sell a new machine to the Third World to those who want to write policy reports. But with grants paid out in cash, one can set a clear rule: say, for each cash dollar physically disbursed to somebody in the Third World, total expenses cannot exceed 10 cents. Simple and efficient.

Now, going to the second point. Professor Lal somewhat extraordinarily writes in his original post that “short of direct or indirect imperialism there seems to be little hope of overcoming the domestic political obstacles to the efficient utilization of foreign aid.” But where was this “direct or indirect imperialism” successful in helping the poor—one wonders? And indeed if we look around today, we have four countries that satisfy Professor Lal’s criterion of being ruled by “direct or indirect imperialism.”

They are Bosnia, Kosovo, Afghanistan and Iraq. Each is a disaster. The first two, havens for smuggling, trafficking, ethnic cleansing and corruption. The other two are not even worth discussing—so obvious is the debacle.

As for the rosy view of Globalization I, it may be useful to recall that while migration was surely (as a share of total world population) greater then than today, a large chunk of that migration was involuntary: from black slaves brought into Brazil and the Caribbean all the way to 1890 or later, to the Chinese and Indian indentured labor driven to Malaya or Guyana. Not everything was sweetness and light.

Taking the “Con” Out of Aid and Growth Econometrics

Steve Radelet seems to be retreating from his claim that aid (unconditionally) raises growth (his original paper was one source of what he now says is the “fictitious” claim that “the impact is large”). Radelet now only claims a “modest” effect. Of course, even modest effects on growth would be wonderful news for aid—just handing over aid money (of Radelet’s preferred type of “short-impact aid”) to a government in the poor country would lead to a permanent increase in the growth every year of personal income. This seems to imply remarkably irresponsible behavior on the part of the donors—they could have reallocated aid from other types to “short-impact aid” (which is only half of aid now) and could have reallocated aid from countries that were experiencing Radelet’s “diminishing returns to aid” to other countries that still had high growth payoffs to aid. Just think of the lost opportunities for poverty reduction in Nigeria, which gets tiny amounts of aid as a percent of GDP. All this poverty reduction could have been achieved by giving much more money to the country’s corrupt politicians, whom most Nigerians (who have apparently not yet heard about the latest positive aid and growth regressions) condemn as wasting the country’s past oil and aid money.

Alas, all these statistical results are built on sand, as Professor Lal rightly notes. They suffer from the econometric equivalent of “even a broken clock is right twice a day.” If you had a hypothesis that your clock works (even though its hands were stuck at twelve o’clock), and tested the clock only on data gathered around 12 noon and 12 midnight, you could prove “my clock works.”

I am not accusing any individual researcher of being so blatant about selecting data to fit the hypothesis that “aid raises growth.” Unfortunately, the same thing often happens unconsciously when econometric researchers only report statistically significant results and don’t report those that simply show zero effects. This may even not involve the same researcher, as the one with significant results gets publicized and the one showing zero effects gives up and works on something else. The selection process happens NOT with choosing some data points and not others, but choosing different slices of the data by adding some right hand side variables and not others. The aid and growth literature suffers from this syndrome big time, with its dizzying array of other control variables and its extreme flexibility as to how to enter aid itself into the growth regression, with a bias towards reporting those of the myriad of possible regressions that show the significant effects of aid on growth. The only real check on this is for subsequent researchers to add new data to the old results following the exact same specification (the original literature could not have anticipated the new data and so it will only fit if the “aid works” hypothesis is actually true). Another possible check is to make small improvements in the specification that are hard to disagree with and see if the results still hold. Such exercises have consistently failed to confirm the positive aid and growth results—they have found zero effect of aid on growth. Q.E.D.

Response to Milanovic on the Tobin Tax, Empire, and Migration

I wondered when the Tobin Tax would come up! This concept envisages taxing financial transactions around the globe to throw some sand into financial markets to tame their volatility. The proceeds to be given to the UN to hand out as welfare payments to the world’s poor may have been endorsed by the World Bank’s Chief Economist and by the French and the Brazilian governments, but these are the usual suspects, whose endorsement by no means ensures that this proposal will get anywhere, as it has not for the last 20 years since proposed by Jim Tobin. Does Branko Milanovic seriously believe that the US Congress will accept such a tax, and even more seriously, even if this unlikely event were to occur, to hand over the proceeds to the UN, whose record in the Iraq food for oil scandal is threatening its very existence? Moreover, with the growing financial integration in the world economy (which of course the French are against), does he really believe that the emerging Asian giants will agree to a tax on their growing financial transactions?

Second, how does he think he will get the dollar to the poor Congo worker collected from a Tobin tax? Will it be through a helicopter drop of money in poor areas? Or will it still have to depend on governments? Remember, the deal the World Bank made with Chad two years ago to devote most of its oil revenue to reducing poverty in exchange for the Bank’s investment in a pipeline to export oil has fallen apart. The government of Chad now wants to use the money for military spending and government salaries!

Third, I am surprised at Milanovic’s implicit argument that Western welfare states, which he wants to globalize, have unambiguously aided the poor. Numerous studies have shown the middle class capture of these Western welfare states. [1] Why would not this happen in a global welfare state?

The point he makes about the failure of imperialism in Bosnia, Kosovo, Afghanistan and Iraq, is precisely why I don’t think this route is feasible for the current imperial power—the US. It has the military might but not the will nor skills to engage in “nation building.” In this it differs from the 19th century British empire, which in its second post-predatory phase (in the words of the magisterial study of British imperialism by the economic historians Peter Cain and Anthony Hopkins) [2] had a “wider mission which can be summarized as the world’s first comprehensive development program”(p.650) . This resulted in generating intensive growth in most parts of the Third World, which had stagnated for millennia, experiencing at best extensive growth. [3] But, as I argue in my In Praise of Empires, the long term commitment this involved in creating an imperial civil service charged with nation-building is no longer available, given the domestic politics of the current global hegemon. So I agree that indirect or direct imperialism for nation building is no longer feasible.

On migration in the 19th century, Milanovic is wrong to state that this was mainly involuntary. As O’Rourke and Williamson have shown, the convergence of commodity and factor prices (which is the essence of globalization) in the heyday of the 19th century liberal international economic order (after 1850) was largely due to voluntary migration of the poor from the Old World to the New. [4] It is this avenue which has been closed to the Third World’s poor.

So I come back to my basic point, taking the world as it is and not as it should be ideally, how do the proponents of aid propose to get the money to the poor without it being siphoned off as it has been by the ‘Lords of Poverty’?

Notes

[1] D. Lal and H.Myint (1996): The Political Economy of Poverty, Equity and Growth- a comparative study, Clarendon Press, Oxford, Chp.9, outlines and discusses these studies.

Rejoinder to Lal: Global Welfare, Empire, and Playing God

I am glad that Deepak Lal has not waited in vain for a Tobin Tax discussion. I cannot speculate when and if the US congress might agree to divest itself of some of its tax-raising powers. Indeed, with the current mood in the country and the current crop of politicians sitting in the Congress, it seems unlikely. But things change… It is of course important that such a large undertaking be spear-headed by an important leader nation. So I would not exclude China or India or Brazil trying to play that role in future, if for no other reason than to show that there may be a multi-polar world after all.

No, the benefit to be distributed in cash would not need to be dropped from a helicopter (although it is not a bad idea). Rough categorical targeting is enough. Consider the real-world situation in Russia in 1992. Instead of giving aid to the corrupt neo-liberal Yeltsin regime, money could have been disbursed directly in cash to the neediest citizens—for example, to pensioners whose earnings plummeted due to inflation and the general chaos. A Global Welfare Agency could have simply used the existing infrastructure of the Russian state, pension rolls, and distributed cash grants to some 20 million Russian pensioners. Today, the same or similar approach could be applied in many countries, from Angola to Zimbabwe. Identify a group that is largely poor (large families with at least two children in school and living in area A; single mothers with at least three kids in area B; sick people in sanatoria or hospitals in area C etc.) and give them a one- or two-time cash grant of, say, $100 per person or per family. As I said yesterday, the approach is both simple and powerful. It involves three steps: raise money from the globally rich, do not deal with governments of either rich or poor nations, and transfer funds in cash to the poor.

I owe the readers the explanation of one point I raised in my first post: why do I find large-scale experiments like PROGRESA, praised by Bill Easterly, ethically troubling? The reason is that those who perform them play God. They intentionally try to find villages or communities that are as much as possibly equal in all dimensions, including how poor they are, distribute aid to one group, withhold it from another and then observe the difference in behavior. Contrast this with the approach of GWA I suggested above. Surely, many people will be excluded from the distribution of cash. But GWA at least makes an effort to determine who is most destitute and then to help them. It does not play God and INTENTIONALLY treat people who are the same differently. I know that these ideas of playing God are very popular among rich people who can, of course, write many nice dissertations precisely because the “control” group is the same in everything but the fact that it did not receive aid. But the approach is nevertheless immoral—or at least needs to be examined from an ethical standpoint (a thing which I believe no one even noticed).

A final point for Deepak Lal. I never said that migrations during Globalization I were “mainly involuntary.” I just said a “large chunk of [all migration] was involuntary.” And I would also say that the idyllic world of Globalization I ended in self-induced imperialist carnage, and that all attempts by people like Martin Wolf (and perhaps Deepak Lal; I have not read his book so I am just guessing) to explain it away fail miserably. For they have a huge problem in their lap: if this wonderful integration of capital, labor and trade worked so well, how did these nice imperialist powers end up at each other’s throat?

Last Rejoinder to Milanovic

Milanovic must live on another planet if he thinks that China and India in pursuit of a multi-polar world will promote a Tobin tax. Having been involved with policy discussions in these two countries for the last few decades, the Tobin tax has never been and is still not even on their distant horizon. I am afraid, painful as it must be for idealists like Milanovic to accept, the world’s great powers are still moved by their national interests, and given their growing weight in the global economies, these emerging giants like the US will be unwilling to have their financial transactions taxed and handed over to some international agency. If he thinks Brazil is moved by a cosmopolitan morality, let him suggest that Brazil agree to a world tax on commodities to be handed to the UN for cash grants to the poor. Unless Brazil has changed radically since I worked there in the 1980s he is likely to get short shrift for such a proposal.

As regards his proposal to hand cash grants to the deserving poor from Angola to Zimbabwe, who is going to be getting these cash grants to these intended beneficiaries? World Bank apparatchiks? Humanitarian activists and NGOs? If they can’t get food and medicines to the hungry and sick because of local government impediments, does he seriously believe these foreign agents carrying their sacks of dollars will be able to hand out their $100 to each targeted family without it being ‘misappropriated’ by local government agents?

On migration, the central question is: would Milanovic support unrestricted migration into the developed world by the world’s poor? Instead of selecting legal migrants by their skills, would he advocate that they be selected instead by their relative poverty? If not, why not, given the universal moral code he espouses in favor of a global welfare state? If he does not advocate this because of political constraints why does he feel free to ignore them in his advocacy of a global welfare state?

His statement that the 19th century globalization “ended in self-induced imperialist carnage,” is wrong in the use of the adjective ‘imperialist’. Even if he doesn’t want to read my book on empires, he should at least read the work of serious historians who long ago refuted the Leninist thesis about the imperialist origins of the First World War, which no doubt Milanovic remembers from school. As a start I would recommend Niall Ferguson’s excellent The Pity of War.

Five Ways to Make Aid More Effective

So the evidence on aid indicates a mixed but somewhat positive record: modest results in many places, strong results in a few, and failure in others. This track record leaves substantial room for improvement. What are some of the key ways that aid can be made more effective in the future?

First, donors should separate politically-motivated aid from development-motivated aid. U.S. assistance to Pakistan and Jordan in the last few years has been motivated by a desire to gain support from key allies on the war on terror. Large aid flows to Egypt and Israel since 1979 were provided to help consolidate the Camp David Peace accords. Aid to Marcos and the Philippines helped keep a U.S. military presence in Southeast Asia after the Vietnam War. These are legitimate foreign policy goals, but they are not primarily about development. The U.S. should provide this kind of assistance through separate accounts and judge its success according to its impact on those objectives, rather than against a contrived development objective.

Second, donors should provide much less of their aid to middle income countries that really don’t need it. Middle income countries tend to have higher saving rates, higher tax revenues, and greater access to private capital markets, yet they historically have received more than one-third of all aid flows.

Third, donors should provide more assistance to countries that implement reasonable development policies and less to countries with lousy policies. There has been some movement in this direction in recent years, manifest most clearly in the new Millennium Challenge Account.

Fourth, donors should move away from one-size-fits all approaches, and provide aid in more varied ways depending on different country circumstances. The popular shift towards “country ownership” and more “participatory processes” makes sense in relatively better governed countries like Senegal and Ghana, but much less so in Chad or Papua New Guinea. In democracies with better governance, more aid (although not all) should go to governments, with more country-led approaches and longer time commitments. But in corrupt dictatorships, give less, make shorter commitments, keep it on a tighter leash, and give most (if not all) through NGOs and faith-based groups on the ground to deliver basic services.

Fifth, aid should be provided with clear targets and aimed at measurable results, and both donors and recipients should be held more accountable for achieved specified goals. This will require specifying up front exactly what a particular aid program is designed to achieve: building so many roads of a particular quality or immunizing a certain number of children. It will also require assessments by independent monitors, not by the aid agencies themselves.

These kinds of changes can help make aid more effective, but it is important to keep expectations realistic. Aid is no magic elixir, and other factors are more important to the development process. And under the best of circumstances, sustained development in the poorest countries of the world is a difficult, lengthy and risky business. In the future we are likely to see a number of continued failures in the most difficult and most poorly governed places, but hopefully offset by a growing number of successes.

3. Provide them with larger amounts of money than other countries; and

4. Hold them accountable for achieving results.

The Administration was slow in getting the MCA off the ground, but the Millennium Challenge Corporation (MCC) has made reasonable progress since it was launched. It has operated substantially differently from other US aid programs in two areas: how it selects countries, and in allowing those countries to set priorities and design programs. In these two areas, the difference between the MCC and other agencies is night and day. The committed amounts of money are somewhat larger than other programs, albeit not at the scale originally envisaged.

The challenges going forward are the tough ones: implementation, monitoring and evaluation, and accountability. It remains to be seen whether or not the MCC will be more effective in these areas. Implementation is at an early stage. There have been some bumps along the road, and it is not always clear that the MCC has absorbed the key lessons from past aid programs. On M&E, the MCC is making progress in setting clearly defined, measurable performance targets. However, there is no true independent entity to measure progress against these goals. And the real acid test lies a year or two in the future: when a country fails to achieve its targets, will the MCC really reduce or redirect aid flows, or will it make excuses and coach countries along to keep the disbursements going? To make performance-based funding meaningful, the MCC and its political backers will have to be willing to demonstrate that they will cut off funding for non-performance and reward strong performance with continued finance for sound projects.

The Last Word

Dr. Radelet seems to have given up trying to make the case that aid raises growth in favor of a heavily hedged statement that aid on some planet sometimes, somewhere does something positive.

Professor Lal and Dr. Milanovic have a conversation on empires, global government, and global welfare systems, which is as fun as it is unrelated to any actual policy debate on aid.

Radelet’s list of recommendations for aid reform reflect the conventional wisdom as refined by countless committees and task forces. Lost somewhere in the muddle is the essential question: can’t we just hold aid agencies accountable for doing something positive and concrete for the poor? I still haven’t heard an answer to the original questions:

Can’t we just hold the agents of charity accountable, so they do get 12-cent medicines to children to keep them dying from malaria, do get $4 bed-nets to the poor to prevent malaria, do get $3 to each new mother to prevent child deaths, do get a preteen Ethipopian girl enslaved to carrying firewood into school?

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